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Monday, July 11, 2011

Uninsured Motorist Coverage Construed in Alabama

Lou Ann and Delbert Downey were on their motorcycle in April 2007 at a stoplight when they were hit from behind by Wyndell Thompson. At left we have an image of a motorcycle helmet, evidencing how it protects you from having your face scraped off by asphalt if you happen to have an accident like the Downeys had.  So PLEASE!  Wear helmets!!!

Helmet Anyway, Thompson had a liability policy of $10,000 through First Acceptance Insurance Company. The Downeys had uninsured/underinsured motorist insurance through Travelers Casualty Insurance on three vehicles but the policy did not mention the motorcycle.  Downeys’ policy included the following provisions:

EXCLUSIONS

A. We do not provide Uninsured Motorists Coverage for ‘bodily injury’ sustained by any ‘insured’:

1. If that ‘insured’ or the legal representative settles the ‘bodily injury’ claim without our consent.

In July 2008, the Downeys, represented by counsel, settled with Thompson and his insurance company for $10,000 without notifying Travelers of the accident or the settlement.  The following year, the Downeys, represented by different counsel, notified Travelers of the accident and made a claim for underinsured motorist benefits. Travelers denied this claim because of the settlement exclusion to the policy.

In Downey v. Travelers Casualty Insurance Company, the Downeys sued Travelers for breach of contract in Alabama State Court.   Travelers had the case transferred to the Federal District Court which certified the following question:

Under Alabama law does the failure of an insured to give prior notice to his or her insurer of a proposed settlement and release of an alleged tortfeasor cause the insured to forfeit underinsured motorist coverage regardless of the insured’s actual knowledge of said coverage and regardless of prejudice to the insurer if the insured has possession of the policy which provides coverage?

The Alabama Supreme Court looked to Lambert v. State Farm Automobile Insurance Co., 576 So.2d 160 (Ala. 1991) which set out a framework for consent-to-settle cases including:

  1. Insured needs to immediately notify the insurance company of a proposed settlement with an uninsured/underinsured tortfeasor.
  2. At the time the insured notifies the insurance company, the insured needs to tell the company whether they intend to file a claim for uninsured motorist benefits. The company must investigate the claim within a reasonable time following.
  3. The insured should not settle without first allowing the company a reasonable time to investigate.

It is well settled under Alabama law that uninsured motorist coverage attaches to a person and not a vehicle.  In addition, as the Downeys were represented by counsel at all stages of the settlement and litigation process, their failure to read their policy is no excuse for their lack of awareness of its coverage. 

The Court determined that by settling the case with Thompson, the Downeys had forfeited their right to seek further recovery.

[JT & Katherine Freeman]

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